Debt mutualisation is immoral and destructive

Let's compare two economic situations. Suppose that in one, everyone in the country loses two per cent of their income – so GDP falls by 2 per cent. In the other, half of the population loses six per cent of their income and the other half none – so GDP falls 3 per cent. Which seems better? We might think that because, in the first case, the total fall in GDP is lower, that makes that one better. Or we might think that because, in the first case, the losses are more evenly spread, again the first case is better.

But now suppose I tell you that in the second case, all of the losers lost their own money as a consequence of decisions they took, while in the first case half the population had losses only because money was confiscated from them. Suddenly the first case doesn't seem so much better than the second, does it?

If we believe in private property and private decision-making, we also must believe in private consequences. If you invest money in a project and it goes bad, it should be you that takes the losses, just as if you invest in a project and it goes well you expect to be able to take the gains. We should not tolerate a system in which people take private gains when things go well, but then mutualise losses (as in the first case above) when things go badly – even if were true that mutualising losses would reduce the total scale of loss.

If it is OK to say to those that lent money to banks: "Now that the bank is in trouble, society will cover the losses so your debts are all repaid", why should it not be OK to say, also "And, by the way, we would also like to share in the gains you made, so we shall calculate all your interest payments and dividends from before the bank got into trouble, and tax you so that we all share in those." Debt mutualisation is an attack on the entire concept of private property.

By mutualising losses we will make economies grow slower, not faster. For we know full well that communist or other economies in which property is held in common grow more slowly than do capitalist or other economies in which property is private. Have policy-makers forgotten this blindingly obvious point?

Since 2007 authorities around the world have sought more and more and more debt mutualisation. States offered guarantees to larger banks to take over smaller banks. Larger bust banks were taken over by governments. Bust governments have been bailed out by other governments. Recent days have seen another flurry of stories about how the euro must be saved by eurobonds (i.e. Germany taking responsibility for Spanish, Italian and other government debts), and about how the eurozone banks must be saved by a "banking union" (i.e. Germany taking responsibility for bailing out all the banks in Europe).

At one level this is astonishing. Can there truly be people left that honestly believe the problem of the past five years has been that there just weren't enough bailouts?

Debt mutualisation is immoral. The most fundamental ethical principles of capitalism are that no investment is without risk, and that the state does not exist to keep the rich. State guarantees of bank creditors threaten these ethical foundations, making capitalism a system in which the poor pay taxes so that the system can keep the rich, regardless of how foolish, lazy, or unlucky the loans they have made might be.

Debt mutualisation is also economically destructive. Financial institutions failing does not constitute a market failure. Firms going bust is not capitalism failing; it is capitalism working — weeding out inefficient and obsolete companies, management, and working practices, so as to make space for new entrants, new ideas, and better managers.

Furthermore, debt mutualisation is the key existential threat to the euro – the reason bond yields in Italy, for example, are so elevated. If the current crop of German politicians accept responsibility for trillions of euros of Italian debts accumulated before the euro even existed, tomorrow's younger Germans will be incandescent, and there is every chance that Germany will leave the euro within a few years, bringing about its end.

Can it really be so hard to accept this principle: if you lend money to someone, and get paid interest for doing so, then if the debt goes bad it should be you that loses out?